Question
Country A can produce 10 units of cloth or 5 units of
wine in a day. Country B can produce 6 units of cloth or 4 units of wine in a day. Which country has the comparative advantage in the production of cloth and wine?Solution
Comparative advantage is determined by comparing the opportunity costs of producing goods between countries. Opportunity Cost Calculation:
- Country A:
- Opportunity cost of 1 unit of cloth = 5/10 = 0.5 units of wine
- Opportunity cost of 1 unit of wine = 10/5 = 2 units of cloth
- Country B:
- Opportunity cost of 1 unit of cloth = 4/6 = 0.67 units of wine
- Opportunity cost of 1 unit of wine = 6/4 = 1.5 units of cloth
- Country A:
- Lower opportunity cost in producing cloth (0.5 < 0.67)
- Country B:
- Lower opportunity cost in producing wine (1.5 < 2)
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